High equity premia and crash fears. Rational foundations

Massimo Guidolin

No 2005-011, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We show that when in Lucas trees model the process for dividends is described by a lattice tree subject to infrequent but observable structural breaks, in equilibrium recursive rational learning may inflate the equity risk premium and reduce the risk-free interest rate for low levels of risk aversion. The key condition for these results to obtain is the presence of sufficient initial pessimism. The relevance of these findings is magnified by the fact that under full information our artificial economy cannot generate asset returns matching the empirical evidence for any positive relative risk aversion.

Keywords: Assets (Accounting); Rational expectations (Economic theory) (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Economic Theory, October 2006, 28(3), pp. 693-708

Downloads: (external link)
https://s3.amazonaws.com/real.stlouisfed.org/wp/2005/2005-011.pdf (application/pdf)

Related works:
Journal Article: High equity premia and crash fears - Rational foundations (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2005-011

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2005.011

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().